Thoughts on Markets

Monday, September 08, 2008

Gold Above 800 and Silver above 12

Unfortunately, both gold and silver seem to be following the trend of the last few reporting days. That is, up in Asia, down in London until near London close, up early in NY and then down the rest of the day. Is the demand really that different from hour to hour? Are markets that different? Certainly, the traders are different and their goals may differ, as well. Nevertheless, it keeps us guessing. The article from asks questions about the 45% increase in Indian demand.

Mining stocks are mixed almost even up and down. DROOY is down to 4.90. However, I am not buying at present. Gold is currently at 810.40 and silver at 12.41. Both are now on an up tick. I believe caution is the watch word until an upward pattern on the price of precious metals becomes evident.

Using GLD as a proxy for gold, the graph from shows a possible double bottom. This bottom is interesting, because there was a gap up after the first bottom and then a gap down toward the second bottom. From the graph, a move to about 85 would be quite bullish.

Editorial from this morning:

"The physical gold market has been immensely strong since the middle of August, with India in the vanguard. There has been regular evidence of Indian jewellers having to pay high premia for physical metal and more than one investment bank has been reporting that gold sales to India have rocketed due to the substantial restocking that has taken place in the local market over the past year. Now the numbers are starting to filter through.

The latest (provisional) figures from the Bombay Bullion Association show imports of approximately 100 tonnes of gold during August, a rise of 45% over August 2007 - although the year-on-year comparison is probably less important than the fact that this increase is a very substantial jump over the first half of the year, when imports were very considerably lower as jewellers drew down on inventory. India typically imports upwards of 700 tonnes of gold in any one year and until the August surge it looked as if imports this year would be down by at least 200 tonnes.

This may yet prove to be the case, but for the next few weeks demand is likely to remain extremely strong and, with physical demand rebounding also in the Far East, as well as the rampant demand for gold Eagles in the US, the refineries are likely to be flat out for some time to come. Heraeus GmbH for example, one of the larger refineries in Europe, has been reporting a two-week waiting list while a large order for Krugerrands emptied the Rand Refinery's vaults last week and the refinery expected to take up to a week to replenish inventory.

Dubai is also reporting strong gold trade, with consumers taking advantage of the fall in prices to start their buying for Eid and Ramadan earlier than they would normally do. The key question for the medium term, therefore, is whether these buyers will continue to buy gold right the way through to the Festivals themselves, or whether their appetites will be sated earlier in the year than usual."

Well, the Federal Government took over Freddie Mac and Fanny Mae over the weekend. The meat is in the details. From the reports we have been able to find, the government will have senior preferred convertible stock which has first claim to 10% dividends. The other holders of preferred stock will have secondary claim to dividends and will thus lose some of the value of the shares. The holders of common stock in the two mortgage giants are likely to wind up with zip. This bailout is reported to cost some $300 Billion, but I suspect it will be much greater as the foreclosures have escalated upward this year and more are on the way. Foreclosures and falling value of real estate has greatly reduced the capital of both of these entities. This is the bailout of bailouts with taxpayers socked with the cost. We will have to watch and see the impact of this on the relative value of the dollar and the reaction of foreigners. Both should see the dollar at greater risk now if they are not viewing the action through tinted glasses.

Ike is scheduled to hit the Galveston, Houston area of Texas about 2 pm on Saturday. The current forecast is that it will hit as a Category 3 with winds 111-130 mph. It will likely cause damage to oil rigs enroute. Thus, we would expect the price of oil to jump up today. The northest side of the hurricanes is normally stronger than the northwest. Therefore, Louisana Gulf coast is likely to get hit very hard, as well.

It has already caused servere rain storms in the Caribbean, particularly Haiti. Ike is scheduled to rake the northern side of Cuba as it moves toward Texas - Louisianna. We must keep the people in its path in our prayers for mercy and a greater appreciation of the God of all.

When we see the power of hurricanes, we should see it as a demonstration of the a small portion of the power of the Sovereign God. He controls all. Often He sends such challenges to teach us more appreciation of Him and His grace. We are too often rejoicing in what we have accomplished and fail to give Him the credit He deserves. Let us thank Him daily for His blessings and ever strive for more obedience to his word. We can only know His law by daily studying His word.

Best to each, Doug


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